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FTSE slips as Barratt leads housebuilders lower and Standard Chartered drops

Discussion in 'Market News' started by Lily, Nov 4, 2015.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Housing companies slip on worries about rising interest rates and margin pressure

    Leading shares are edging lower, with Standard Chartered leading the way down after a third quarter loss, a £3.3bn fundraising and 15,000 job cuts.

    But housebuilders are also subsiding on concerns about weaker house price inflation and the effect of rising interest rates. Stronger UK manufacturing figures on Monday prompted some talk that the Bank of England could sanction dearer borrowing costs more quickly than expected.

    We believe the largest housebuilders’ valuations are too optimistic to withstand the gross margin pressure that we expect in the coming years as house price inflation is suppressed by a more vigilant regulator and build cost inflation returns. We cut our ratings on Barratt, Persimmon and Taylor Wimpey from Hold to Sell. There is better value in builders who can grow profits by raising output: top picks Bellway and Gleeson.

    House prices are much more stretched than widely assumed because price/income multiples are now watched by a regulator with growing powers. Stricter controls on lending standards will depress house price inflation, which could cause gross margins to fall as build costs have started rising materially, especially labour. Falling gross margins will lower returns especially for those not growing output.

    Rarely do we find aerospace and defence companies which are simply too cheap. But post last week’s warning Meggitt is firmly in that bracket. At 10 times 2016 PE, 9 times enterprise value/EBITA with a comfortably affordable dividend yielding around 4.5%, the shares trade at a 25% discount to their own historical averages versus the sector in spite of a 6% earnings per share compound annual growth rate and unmatched cash progression. We too harbour concerns around near term visibility and capital deployment discipline, but this looks to be more than in the price.

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